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NAMA’s annual accounts for 2011 handed over to Minister Noonan – will NAMA need more capital?

March 31, 2012 by namawinelake

Today is the last day for NAMA to hand over its latest quarterly management report and accounts to Minister for Finance, Michael Noonan. The accounts will cover the three month period ending on 31st December 2011 and will also show the annual figures for 2011. For the first time in NAMA’s reporting of its results for 2011, we will see what NAMA calculates to be its so-called “impairment charge” – this will make the difference between profit, and remember NAMA was last week forecasting a profit before impairment of “at least €750m” and loss, sadly NAMA didn’t have an estimate of impairment charges last week. Although these accounts that are due today are not fully audited, and NAMA will not publish its full annual report until the summer, these accounts should give an accurate picture of NAMA’s performance in 2011. Here are seven things to look out for:

(1) The impairment charge. This charge represents the decline in value of what NAMA expects to recover on its loans to developers which totalled about €32bn by reference to NAMA’s acquisition values and €74bn by reference to the original values of the loans. The decline in value is largely driven by declines in underlying property values. In 2010, NAMA’s first full year of operation, NAMA booked a €1.485bn impairment charge. NAMA does not calculate an impairment charge every quarter and waits until the end of the year to conduct what is a large exercise. The betting on here is that the impairment charge will be in the order of €1bn for 2011, but unlike 2010, you can rest assured that the impairment charge for 2011 will be examined on here with a fine tooth comb.

(2) Will NAMA need more capital from the State? You’ll recall that NAMA is an entity with €100m of share capital, with €49m from the State and €51m from “three independent investors” – namely AIB, ILP and Bank of Ireland. And you’ll also recall that NAMA made a loss of €1.1bn in 2010, its first full year of operation. So you might have expected the €1.1bn loss to have wiped out the €0.1bn share capital but no, NAMA performed a little accounting trick whereby part of the payment it made to buy the €74bn of loans from the banks was classified as capital. The so-called “NAMA subordinated bonds” comprise 5%, or just over €1.5bn, of the €32bn that NAMA paid for the loans. NAMA doesn’t have to honour these subordinated bonds if by 2020 the Agency hasn’t broken even. So in 2010, NAMA got away with adding the €1.5bn to the €0.1bn share capital which meant that the Agency still had €0.5bn of “capital” left after deducting the €1.1bn loss. If NAMA makes a loss after impairment in 2011 of more than €0.5bn then NAMA will need to get more capital, something that it has been adamant it won’t need to do.

(3) NAMA’s interest income from developers. We now have considerable detail about the way in which NAMA calculates its interest income, and we know that NAMA doesn’t just account for cash received – it estimates additional interest it will receive when the underlying asset is eventually sold. This has led to all sorts of accusations of Enronesque behaviour, so the interest income reported for 2011 and impairments to that income will be closely examined to ensure NAMA is not overstating profits that will vanish when the assets underpinning the loans are eventually disposed of.

(4) NAMA’s provision for legal costs in the Paddy McKillen case. You’ll recall that Paddy took a case against NAMA in 2010 to stop the Agency from acquiring his loans. Paddy lost comprehensively in Dublin’s High Court but went on to substantially win his case at Dublin’s Supreme Court, and NAMA ended up having to foot the bill. It’s been a year now since the Supreme Court concluded its deliberations and NAMA recently told an Oireachtas committee that it had still not established the costs that the Agency will need pay in the case, though media speculation has centred on a figure of €7m. Minister Noonan told the Dail a week ago that NAMA had not made any provision for an accrual for these costs in its last quarterly accounts, but we will expect NAMA to make a proper provision in its year end accounts.

(5) NAMA’s disposals and profit/loss thereon. It came as a surprise on here to learn a week ago that for the 22 months to the end of September 2011, NAMA had booked disposals of €2.7bn in its accounts. This was surprising because NAMA has been mentioning figures for “approved sales” of €6bn-plus, though of course some approved sales fall through, others take time to complete and some sales may result in payments to other lenders eg Ulster Bank where there were syndicated loans. But even more surprising was the fact that NAMA had booked a profit of just €132m on these €2.7bn of sales because the perception had been that most of these disposals were of the best quality assets in the most liquid markets, ie London where residential and commercial property prices have performed well since NAMA’s valuation date of November 2009. We’ll want to see how NAMA accounts for its biggest single sale to date, the €800m sale of loans in Paddy McKillen’s Maybourne group to the billionaire Barclay twins, which Paddy is presently challenging in a London court. NAMA might have to reverse that transaction and pay Paddy damages – how will the Agency recognise these risks?

(6) Staff and directors’ costs. Although some will begrudge Brendan McDonagh his 2011 salary of €430,000 – which he has agreed to reduce to €365,000 for one year in 2012 – and his bonus – contractually up to €258,000 but which he 100% waived again for 2011 – you might have sympathy for the man when he looks across to IBRC, as Anglo/INBS is now called, where Mike Aynsley cost that company €866,000 in 2011 comprising salary €500,000, pension €125,000, car allowance €38,000 and “other” of €203,000 which includes rent, personal travel and “relocation”. The boss of Blackstone took home almost €200m in 2011 and the boss of BlackRock took home nearly €20m. And yet, there’s Brendan who reputedly works 70 hour weeks in a highly charged political environment, in a commercial environment which is, very euphemistically, “challenging”, dealing with new teams, new legislation with individuals and companies lined up like that scene out of Airplane! with fists, baseball bats, knives and guns, waiting for their opportunity to put the boot in. Beyond Brendan, we know that NAMA chairman, Frank Daly has taken a pay-cut to €150,000. It will be interesting to see what NAMA’s newest director, John Mulcahy gets. And it will also be interesting to see what salaries are being paid to the 202 employees at the Agency. It will be fascinating to see what expenses the non-Irish NAMA director, Steven Seelig has managed to rack up in 2011 – it was €35,000 in 2010.

(7) NAMA’s profit or loss. This would normally have been the headline item in this list, but we already have a good idea of what the profit before impairment will be. Brendan McDonagh told a London audience last week that the profit before impairment would be “at least €750m”. But we know that this includes at least €250m of inflated interest income which has not yet been received and apparently depends on NAMA or the developers selling underlying property at November 2009 prices plus 9% for Long Term Economic Value. So what we want to know is what adjustment NAMA will make to its interest income and also how much it will reduce the value of its loans to reflect deteriorating property prices in Ireland.

So when will Minister Noonan publish these accounts?

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Posted in Developers, Hotels, Irish economy, Irish Property, NAMA, Non-Irish property, Politics | 15 Comments

15 Responses

  1. on March 31, 2012 at 11:34 am brianmlucey

    Reblogged this on Brian M. Lucey and commented:
    Super stuff as usual from Namawinelake in Nama


  2. on March 31, 2012 at 1:03 pm sf ca writer

    About that 3.1 billion
    I could not figure out why NAMA feels confident B of I (or anyone else) would be able to repay 3.1 billion next year.
    Perhaps this is where China comes in.
    Perhaps a nice deal for some utilities and oh I don’t know, the Lakes of Killarney, and the debt will be made good.
    There are stranger theories out there.
    It’s a long way from a midlands ghost estate to Shanghai. But there you go.
    http://wp.me/p28tG9-6v


  3. on March 31, 2012 at 2:07 pm John Gallaher

    they should break this out,shareholders/stakeholders must be allowed monitor this.What interest rate is charged,are they performing,is NAMA a good lender?

    “NAMA has approved total working and development capital advances of €1.1 billion, of which €506 million relates to Ireland. Ireland accounts for 56% of total assets linked to NAMA loans.”


  4. on March 31, 2012 at 5:14 pm who_shot_the_tiger

    The impairment charge: It will be much easier to deduce this forensically now that NAMA has provided a breakdown of its loans both geographically and by sector.

    The inflated interest income that “apparently depends on NAMA or the developers selling underlying property at November 2009 prices plus 9% for Long Term Economic Value.” Is this the actuality? Or is it this – plus the rolled up interest charge?


    • on March 31, 2012 at 5:30 pm namawinelake

      @WSTT, not sure what you mean by “the actuality”. As we have been finding out over the past couple of months, the interest income shown by NAMA in its accounts is actual cash received plus a provision for interest which depends on the ultimate value realised from the loans and that in the main depends on the sale value of the underlying property.

      So NAMA has booked €750m for the first nine months of 2011 of which about €250m is a provision for future receipts.

      It has been suggested that the impairment charge will comprise two elements (1) a reduction in value to reflect declines in property value and accordingly declines in what the loan will actually realise for NAMA and (2) an adjustment to interest income to reflect the fact that NAMA’s EIR assumes Nov 2009 values plus LTEV still prevail and in NAMA’s main market, Ireland, values have declined substantially.


  5. on March 31, 2012 at 7:41 pm who_shot_the_tiger

    @NWL, NAMA stated that the EIR was based on November 2009 prices plus 9% for Long Term Economic Value. It then adds an interest rate (say4% per annum) and estimates a potential sales value say 5 years later.

    The question is “How real is that estimated sales value?” as it appears to be based off the acquisition price in November 2009 plus accumulated interest which is no way to forecast a future price considering the fall in values in Ireland since November 2009.

    If, as you state, the capital values are lower and the projected price including the rolled up interest is not achieved, where and when is the loss recorded? Is it a capital loss? How will the uncollected interest be treated? Will it be ignored and left in the books as though it was collected, or will a charge be taken against it when the property is sold? Is the whole exercise just “smoke and mirrors” to show interest being paid where none was paid at all in order to pad the profits out in the early years and take the loss at the end – the ol’ “kick the can…” strategy.

    Or is NAMA dealing in actualities – i.e. Is it factoring in the reality of the loss in values since November 2009 when it calculates the profit? Is it discounting the future sales value by the accumulated but not paid interest when it calculates the current value of the loan?

    Maybe the answers to those questions are out there, but I haven’t seen them.


  6. on March 31, 2012 at 9:44 pm who_shot_the_tiger

    @NWL, I haven’t seen any admission that the impairment charge will include a full reduction in value to reflect declines in property prices from November 2009 to date. Nor am I aware of a NAMA statement that it would make an adjustment to interest income to reflect the fact that NAMA’s EIR assumes November 2009 values plus LTEV and therefore does not reflect the reality of the fall in values to date. Did it actually make such a statement?


    • on March 31, 2012 at 9:50 pm namawinelake

      @WSTT, no, NAMA has said little about how it calculates its impairment charge. Last year, it got lost a little in the year end reporting. The impairment is supposed to reflect NAMA’s current assessment of what will be paid on the loan, which given the collapse in property values in Ireland and with developer equity wiped out, NAMA will normally recover the value of the property plus any additional security or guarantees.

      There will be a focus on here on NAMA’s impairment charge when its Q4,2011 accounts – which were due to be delivered by latest today – are published, and although there shouldn’t be any reason for Minister Noonan to sit on the accounts, last year we needed to wait five weeks to get them.


  7. on March 31, 2012 at 10:13 pm who_shot_the_tiger

    @NWL, That’s my point. NAMA’s projected recovery price would need to be discounted by the rolled up value of the EIR because it (the interest) is not being paid – but it is being booked to the bottom line by NAMA as though it was being paid.


  8. on March 31, 2012 at 10:32 pm sf ca writer

    At the moment, would the drop in portfolio value due to using a 2009 valuation, plus any LTEV crapola (not sure how that was quantified), plus the dodgy accounting stuff relating to interest not received… be in the region of 10 billion? or which region are we talking about ?


  9. on April 1, 2012 at 12:49 am who_shot_the_tiger

    @sf ca writer: I believe that €10 billion will be the ultimate true NAMA loss. And I think that following the geographical and sector split provided by NAMA, it will now be possible to prove it without any doubt.


  10. on April 2, 2012 at 10:32 am Ahura M

    @ NWL,

    Note 14(page 68) of the IBRC annual report shows a gain of €776m for IBRC on the disposal of assets to NAMA.

    “During the year the Bank has recognised a net reduction of €776m in the overall reported loss on disposal of assets to NAMA.
    This results primarily from settled valuation adjustments relating to the completion of full due diligence by NAMA on assets
    previously transferred.”

    Is this something NAMA has issued more bonds to cover? (i.e. the assumed haircut was too big and therefore NAMA need to reimburse IBRC). Perhaps this is something NAMA has already addressed, but escaped my attention.


    • on April 3, 2012 at 4:04 pm Ahura M

      bump! Any takers?

      I’m trying to figure out if NAMA issued new debt in Q4 11. As at 12 Feb 12, the oustanding balance of Snr notes is 28,970m, but note 16(Debt Securities in issue) in NAMA’s Q3’11 accounts show 27,886m as at 30 Sept 2011. AFAICT the Q3 accounts strip out jnr debt, so was there 1.1bn new debt in Q4?


      • on April 16, 2012 at 10:07 am namawinelake

        @Ahura, I am just looking at this now. Indeed there was €1.1bn of new NAMA senior debt issued between Oct – March. It remains unclear if this new debt was paying for loan acquisitions – remember there were about €2bn of stragglers so a €1.1bn debt issuance would fit with that. But yes, Anglo does indeed say that a “favourable adjustment” of €776m was made to its dealings with NAMA which presumably means NAMA issued Anglo with an additional €776m of bonds after NAMA had undertaken its due diligence and detailed valuation. However we don’t know when this €776m was issued by NAMA and it might already be included in the latest management accounts for Q3, 2011. I would have expected NAMA to issue a statement if it had any effect on NAMA’s finances, but presumably it is neutral in NAMA’s accounts, the debt issuance is offset by NAMA increasing the value of the Anglo loans by €776m. However we will need wait for the NAMA Q4 accounts to clarify this.


      • on April 16, 2012 at 11:15 am Ahura M

        @ NWL,

        Thanks. I agree that it’s a tough one to figure out. NAMA’s quarterly accounts would suggest at least some activity in Q4, but maybe not the 776m. The relevant sections in the quarterly reports is Note 16 (note 14 for Q1).

        There is one obvious description (in this note) – “Issued in the quarter”. For Q1 zero issued to Anglo/INBS, 416m to AIB and 16m to BOI. For Q2 316m issued – this is not broken out by bank (there is a note that says of this 316m, 305m was for adjustment relating to bulk transfer and that in Q1 the equivalent amount was 16m. For Q3 zero bonds issued.

        There is a less obvious description – “Non Cash Redemptions”. I don’t readily understand how this works (if it’s not cash, what is it), but it seems to relate to adjustments to bulk transfer. For example here is a description from Q2- ” There were non cash redemptions of bonds in the period of €168m (Q1: €91m). These non cash redemptions resulted from a reduction in consideration due to Participating Institutions following the completion of due diligence in respect of loans acquired as part of the “bulk transfer” in quarter 4, 2010.” The Q3 figure was 5m. So, in total, is seems to fall short of Anglo’s 776m.

        I guess where this is important is whether you would need to reduce the discount NAMA has paid (i.e. increase projected losses).



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